Rare Nasdaq-100 Signal Called the Sell-Off

Last week, 52% of Nasdaq-100 Index (NDX) stocks hit a new 52-week high. There have been just two other times in history when more than half of NDX components notched an annual peak in one week, and both signals preceded short-term pullbacks for the index. So, was this week's steep stock market drop in the cards for the Nasdaq-100 and its sector peers? The sample size is small, of course, but below is how the index performed after previous signals.

The last time more than 50% of Nasdaq-100 stocks reached a 12-month high in the course of a week was July 2013, according to Schaeffer's Quantitative Analyst Chris Prybal. The only other signal occurred in mid-February 2011.

One and two weeks after both signals, the NDX was in the red. On average, the index was down 1.42% one week later. So far this week, the Nasdaq-100 is down 0.5%. Two weeks after the signals, the NDX was down 1.39%, on average. For comparison, the tech-rich index has averaged anytime one- and two-week gains of 0.14% and 0.27%, respectively, since 2000, with win rates above 50%.

Looking one, three, and six months after signals, the NDX took opposite paths in 2011 and 2013. Specifically, it was a rough few months for the tech-rich index in 2011, while the latter half of 2013 boded well for the shares.

So, is this week's stock market breather the start of a correction? Again, while the sample size above is small, it's interesting that Nasdaq-100 stocks declined the two subsequent weeks after both of the previous signals -- not to mention we just saw a separate "alarm bell" ring for tech not long ago, per founder and CEO Bernie Schaeffer.

However, don't dump your long positions just yet. As Schaeffer's Senior V.P. of Research Todd Salamone pointed out in this week's Monday Morning Outlook column, "[T]here has indeed been an unwinding of extreme fear that has been supportive of stock prices, but it's doubtful that we're in the kind of euphoric stage that is typically coincident with a major market top."